Beginning of the end for coal? Citi sees structural decline

A new series of reports from global investment bank Citigroup says coal is in structural decline because of regulation and rival technologies. Even the role of gas will be limited by the rise of renewables – all of which will have a significant impact on Australia, which is setting policy that defies market trends.

A new series of reports from global investment bank Citigroup has highlighted the dramatic changes that are sweeping the world’s largest energy markets, and which will have a significant impact on the future of the coal industry in Australia.

The first is that emission standards and rising costs will force a mass closure of coal-fired generation (more than 60GW) in the next few years in the world’s biggest market, the United States. And contrary to most expectations, it says gas will play only a minor role in this “energy transformation,” because it will be usurped by the falling costs of renewables.

The second conclusion is that increasingly strict environmental measures are severely limiting the feasibility of opening new coal plants, not just in the US and Europe, but also in China – which for the past few years has dominated the global coal market and has been the world’s biggest consumer and importer.

In short, Citigroup says, the evolution in electricity markets is being driven by a combination of regulatory and technology changes.

This, it says, has major implications for Australia’s vast coal resources, which require huge investments in infrastructure (rail lines and ports), and may simply not make economic sense. It already notes that financiers are absorbing these lessons, and many Australian projects have been delayed as a result.

The assessment – part of a growing flow of such reports from the world’s financial community – notes the growing risk to fossil fuels, and what Citigroup itself described in an earlier report as the impending “Age of Renewables.”

Australia, however, seems determined to ignore these headwinds completely, or fight against them: the new Abbott government is dismantling its signals for clean energy investment, is imposing no emissions standards or pricing signals, is removing energy efficiency goals and support schemes, and is determined to invest in new coal projects despite the global market signals.

“The shale gas revolution was the first blow, but rapidly declining wind and solar costs and the spread of unconventional gas production techniques are set to erode coal’s long-time cost advantage over alternative electricity sources.”

To illustrate the changing nature of the US market, Citi published these graphs below. The first, on the left, highlights the trends identified by Citi, a short-term burst of gas-fired generation in coming years, before all new capacity is taken up by wind or solar. Some reports suggest solar is already substituting for peaking gas plants. The graph on the right illustrates the scale of closures in the coal industry, with the biggest hits to come from regulatory moves in the next four years.

“Increasingly strict environmental measures are also severely limiting the feasibility of opening new coal power plants not only in Europe and North America, but in China as well.”

It says Australia does not lack coal resources, but the reality is that new projects require billions in long-term infrastructure commitments, which increases the cost and creates a higher return hurdle. The global coal price, meanwhile, is sinking further, with Citi predicting a price of just $US72/tonne this year – well below the break even estimates of most Australian coal mines, particularly the mega projects envisaged in the Galilee Basin.

“Investors are increasingly considering whether some fossil-fuel related assets might become “stranded”, with significant loss of value, if stronger carbon constraints are imposed to mitigate the risk of dangerous climate change, or if alternative energy solutions become technically and economically more attractive,” Citi notes.

As a result of this, financiers are taking a cautious view, which explains the delay in many Australian coal projects – where there are more than $60 billion of projects either publicly announced or in feasibility study, but only one – the controversial Whitehaven development at Maules Creek – is in development.

“Where once there was a long list of projects that should have been underway by now in Australia, projects have dramatically succumbed to the reality of lower prices and high capex/capex intensity,” Citigroup notes.

It says China is no longer paying lip service to environmental issues, and it represents the most significant shift in environmental policy related to coal. Demand will slow as the China economy

transitions away from investment and manufacturing led growth, as alternative power capacity is built out, and environmental measures are enacted to discourage coal usage. It may cease to become an importer.

“To reduce China’s dependence on coal, the government is pursuing an “everything but” strategy,” Citi notes. “This includes rapid build out of solar, wind, nuclear, and natural gas generating capacity.” Solar, it says, will provide the fastest growth while the largest volume growth will come from hydro.

It also means a renewed focus on carbon markets. Citi includes this graph to highlight the recent growth in volumes on the country’s nascent carbon exchanges, which are coming into play just as Australia looks to end its carbon price.

In India, the other great hope for coal producers, Citi says imports are likely to be capped at lower-than-expected levels because coal consumption will be lower than forecast.

Here are some other key takeaways from the reports:

On Utilities:

“The transition period from now to 2020 could give utilities time to evolve until new technology and a new paradigm begin to play a much larger role in energy consumption and power generation. At first glance, more rooftop solar and distributed generation, along with slowdown in power sales, and lower peak power prices and heat rates, are headwinds to merchant power generators. But it still takes time for new sources to fully develop and integrate into the market.”

And on gas:

“The growth in gas demand for power generation could be less significant than is commonly believed. Gas is commonly thought of as the substitute fuel for coal in power generation once coal plants retire. But rising renewables generation should increasingly take over market shares of coal and gas-fired generation, particularly in an environment of slow electricity demand growth.”

Giles Parkinson is founder and editor of Renew Economy, and is also the founder of One Step Off The Grid and founder/editor of The Driven. Giles has been a journalist for 35 years and is a former business and deputy editor of the Australian Financial Review.

Giles Parkinson is founder and editor of Renew Economy, and is also the founder of One Step Off The Grid and founder/editor of The Driven. Giles has been a journalist for 35 years and is a former business and deputy editor of the Australian Financial Review.

12 Comments

Alen 5 years ago

It feels like every week there’s a new story about banks, financiers or investors in general, who are forecasting the demise of coal. Seems t me that if you’re a company still planning to go ahead with a new coal project you must either be very brave, stupid or smart (as you must have someone unknown information that puts all these reports in the wrong). If the meeting in Paris next year is successful in achieving commitments for new reduction targets, it will also create much pressure on the highest polluting energy resource, i.e. coal, which ultimately I assume the big ‘moneylenders’ know and are aware of

Tom Gray 5 years ago

Indeed. While fossil fuel companies have done a great job of constructing a fantasy world in which carbon emissions have no consequences and persuading politicians (via campaign contributions) to endorse that fantasy, businesses (in particular the insurance industry) still have to operate in the real world, where global warming has serious consequences. I think the real question before us is, can we tax/regulate harmful fuels fast enough to reduce their value enough to avoid a massive financial collapse when the real numbers are finally added up.

Don Osborn 5 years ago

Very well put.

wideEyedPupil 5 years ago

Well such an economic collapse would have to be predicated on their not being alternative energy sources at reasonable cost. But as recent Citi reports have illustrated the alternative are there and increasingly eroding coal and gas even without carbon pricing.

Unless by economic collapse you meant an ecogical collapse driven by climate change which would of course send the price of food sky high. Especially with so many meat eaters on the planet over consuming ten times the resources of vegans.

climatehawk1 5 years ago

No, by economic collapse, I mean a sudden crash in the stock prices and market values of fossil fuels companies. At the moment, this is something that would dwarf the Great Recession caused by the inflation of housing prices.

david_fta 5 years ago

You do realise that Australia’s entire transport fuel requirements would be met by the oil extracted from algae if the pond was 100km x 100 km?

If the petroleum companies were smart, they’d already be planning such ponds to supply their refineries – hence no need for petroleum company shares to collapse.

climatehawk1 5 years ago

I don’t doubt it, but of course, the operative word is IF. For some time it has been a no-brainer for Republicans in the States to support wind power as a proxy for accepting climate science. Wind power is strongly beneficial to their constituents, and it would be a no-regrets way to cut carbon emissions. Instead, they are doing their best to kill it, because of fossil fuel campaign contributions.

In Australia’s case, if we replaced all our taxes, excises, levies and rtes with a single consumption tax on fossil fuel at ~$900 per tonne CO2 ($3300 per tonne carbon in fuel), then government income would not be affected – but suddenly solar PV and electric vehicles would be way cheaper than coal-fired power and diesl or petrol vehicles.

In the second year, the rate of consumption tax would have to go up because of all the tax-dodging Aussies who’ve gone over to solar and Teslas, and so on thereafter.

wideEyedPupil 5 years ago

The Citi graphs are a bit confusing to say the least. On the first pair the 2014 values for total energy are 12 GW and 8 GW (approx) respectively. From there on renewables disappear off the the graph completely ?! This is total consumption not added capacity built per year right?

Then the bottom graph uses a stacked line graph but one wonders if it’s actually had the values ‘stacked’ ie cumulative at all. Eratic graph at the least not sure what it is supposed to be illustrating.

“A leading US investment banker is warning of the risks to ‘stranded assets’ posed by climate change. Bob Litterman was Vice President of Research at the US Federal Reserve before working for 23 years at the big US investment bank Goldman Sachs, including during the Global Financial Crisis.

Litterman is in Australia talking to superannuation funds and investor groups. He says no country wants to act alone on climate change but he predicts the world will soon see more political commitment.”